Cross-border: COVID–19 and Managing Tax Risks in intercompany transactions

By Giuliana Polacco, Francesco Drago, Willem Bongaerts, Benjamin Lichtle

05-2020

The current health emergency with the unprecedented lock down measures adopted by Governments have disrupted the regular business and supply chain of multinational groups. All countries, supported by the OECD, are trying to implement tools and legislation aimed at sustaining the cash flow of taxpayers, by offering long terms loan and postponing the payment of taxes.

The operational and financial disruption may affect intercompany arrangements and the transfer pricing policy adopted. It would be, therefore, essential to address the consequences and opportunities that extraordinary events may have on intercompany transactions and the relevant remuneration in order to manage the negative impact of the current crisis and prevent risks in future years. 

Indeed, it may be foreseen that after the suspension from their activities and the reduction of tax collections experienced following the COVID-19 emergency, tax authorities will start again their audit activity with even a more aggressive approach. 

Without claiming to be exhaustive and among the various issues that international groups may face in this area, they should pay particular attention to the following subjects:

  • Potential strengthening of the justifications to be included also in the transfer pricing documentation of the transfer pricing policy if it leads to significant discrepancies in the profitability levels of companies involved in one or more related transactions;
  • Thorough analysis on how the actual circumstances could justify an adaptation of the transfer pricing policies; 
  • Sustainability of the risk profile of certain entities;
  • Review of the contractual arrangements among the group (also in view of the benefit that local country subsidiaries can be granted by local governments to boost liquidity);
  • Methodology of calculation and allocation of management fees due to the inactivity or slow-down of business processes, together with the potential impact of states subsidies on the costs to be allocated;
  • Questioning or optimizing the tax most efficient way to structure the detention and use of intangibles within the group (cost contribution agreements or licensing to related entities); 
  • Managing advance pricing agreement procedures in an uncertainty scenario; 

Opportunity to rethink part of the supply-chain performing stripping of functions and/or business restructuring (including e.g. transfers of Intellectual Property).

Please note that the current challenges and opportunities would need to be viewed in the light of the changes that were already being implemented in view of the anti-tax avoidance measures as proposed by OECD (BEPs) and the European Union (ATAD). The time is right to have a holistic approach on the opportunities and challenges.  

Our team of specialists in transfer pricing and international taxation is at your disposal to support your group through the systematic and global approach they specifically developed, aiming at securing your transfer pricing policy or adapting it in a tax efficient way by:

  • Valuating the transfer pricing policies in force and suggesting possible adaption to the actual context;
  • Reviewing of the functional and risk profile of group's entities redefining target profitability and possible transfer pricing adjustments;
  • Reviewing of the benchmark analysis to reflect the downturn;
  • Reviewing and adapting the agreements supporting intra group transactions ;
  • Assessing the impacts of transfer pricing potential adaptation on withholding taxes, custom duties and VAT;
  • Usage of available loss carry forward and reduced values in the group (lower goodwill upon migration of functions) 
  • Negotiating of the terms and conditions of advance pricing agreement procedures with Tax Authorities. 

 
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